What are Second Mortgage Financing?
If you are like most homeowners, you probably have a first mortgage loan on your home. Typically, such loans are for 15 to 30 years, with the monthly payments adjusted so that the loan is paid in full at the end of the term.
As you make monthly mortgage payments and the value of the home increases, your interest in the property (called "equity") grows. After a while, some homeowners may wish to borrow against the equity in their home to get cash, to make home improvements, to educate their children, or to consolidate personal debts. Because such loans are in addition to the first mortgage on the home, they are commonly called "second mortgage" loans.
Second mortgage loans are different from first mortgages in several ways. They often carry a higher interest rate, and they usually are for a shorter time, 15 years or less. In addition, they may require a large single payment at the end of the term, commonly known as a balloon payment.
Typically second mortgages fall into one of the two following categories:
- Equity seconds - Equity seconds are second mortgages that use the equity you have in your house as the basis
upon which a lender loans you money. Most lenders will require an appraisal in order to establish your house's value and the equity contained therein. Borrowing with an equity second normally allows you to obtain a better rate due to the fact that the money borrower is secured on property you have ownership in.
- Over-equity seconds - Over-equity seconds are second mortgages that lend you money over and above the value of
your house. Over-equity seconds are commonly known as "125's" or "115's" because they allow a lender to loan you money at 125% or 115% of your house's value. Requirement of appraisal is based upon the amount of money borrowed. Typically, if you plan to borrow over $35,000 on an over-equity loan, an appraisal is required. Borrowing with an over-equity second allows you to obtain a loan when a personal loan may have not been possible.
Reducing your monthly payments with a new second mortgage can offer some welcome relief from bills that seem to have never ending balances. You could be saving hundreds of dollars each month, plus the allowable tax deduction could save you even more.
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